Wednesday, April 29, 2009

Croaking Class of Persons

Every now and then I read a quote that makes me want to shout out "Yes, that's exactly what I want to say, and damn does it sound good!" I've been reading historian Burton Folsom's book Entrepreneurs vs. The State (With a title like that, you know it's good. I think it's out of print now, but I think his The Myth of the Robber Barons is very similar if not the same). It's a very entertaining and enlightening read, and I recommend it if you get the chance.

Anyway, he has a chapter devoted to the founders of Scranton, PA. They were the Scranton brothers and their associates, who started the Lackawanna Iron and Coal Company as well as the Delaware, Lackawanna, and Western Railroad. Some of these men were great capitalists who amassed a fortune, as well as built and planned the city of Scranton.

In this chapter, Folsom discusses how the local farmers were not too keen on these city boys buying nearby land and building factories on it (although they did not complain about the easy freight access). They did not want "the 'machine' [to] transform their 'garden' into an industrial community." It's easy to see that these farmers were anti-capitalist Luddites of the oldest and most enduring breed. Folsom then presents the reader with a quote from a Lackawanna Valley historian, Horace Hollister, describing the farmers. No description would do justice to this quote, so just read:
There were then, as there are yet, and as there always will be, a debilitated, but croaking class of persons who by some hidden process manage to keep up a little animation in their useless bodies, who gathered in bar-room corners, and who, with peculiar wisdom belonging to this class while discussing weighty matters, gravely predicted that "the Scrantons must fail!"
Substitute "capitalism" for "the Scrantons" and you've got a description of every whiny, lazy, self-hating moocher now crowing for government to lead them and tell them what to do. "Croaking class of persons;" I love it!

To Clarify My Point

I feel I should respond to Kendall's comment on my previous post, because he makes a few excellent points. Yes, the government's new and expanded ownership of GM and Chrysler is a very bad thing, existentially speaking. The Obamanons will have no problem lavishing favors on their new territories, attempting to stifle any competition from Ford (unless it, too, starts hurtin' for some gov'ment lovin') as well as all the foreign producers. Americans may be left with no financially sound choice but to purchase environmentally friendly, unoffensive, unsafe, Yugo-esque government-issue wagons.

When I stated that I thought this development was a good thing, I meant that in a more PR-ish way. I prefer the open tyranny of socialist ownership of business to the silent tyranny that has been running rampant. The secret blackmailing of bank executives, followed by the public excoriation of said executives for doing exactly what they were forced to do. The public "aid" for auto manufacturers accompanied by increased fuel-efficiency regulations, which I'm sure help with that cash flow problem. Maybe my optimism about the open federal ownership of these companies is simply due to my weariness from the underhanded backroom dealings that have become governance-as-usual.

Right now I'm optimistic that out-and-out socialist government ownership of GM and Chrysler can shock people into opposition. When I have no option but to drive a tin can on wheels that can only run on corn juice, I will probably lose said optimism.

Thanks for the comment, Kendall. And, of course, Boilermakers are always welcome on this site, even thought IU is better.

Tuesday, April 28, 2009

20th Century Motor Company, Anyone?

Okay, so today, GM announced its plan for how it's going to emerge from its current dilemma. Here is what the brains trust has produced:

Under the plan, GM is asking the Treasury Department for an additional $11.6 billion in loans, on top of the $15.4 billion it has already received. It envisions giving the government at least half ownership of the company as payment for half of the loans.

At the same time, GM said it would use stock instead of cash to pay off half the $20.4 billion it owes a United Auto Workers fund to cover retiree health care. That stock would leave the union owning about 39% of GM.

Um...what? So, if the Obamanoms own over half of the company (making it a government agency, right?) and the union owns 39%, what exactly is GM? Apparently 11% is left for whatever brain-dead shareholders want to go along for Mr. Car Czar's Wild Ride.

Believe it or not, I see this development as a good thing. GM abandoned maximizing shareholder value (the only valid purpose of a firm) as its guiding purpose long ago, in favor of a "stakeholder" position. This was not the shareholders' fault, really. The government has forced GM to comply with almost as many regulations as the financial industry must contend with. And labor makes sure that what little money GM makes from cars goes directly to them. This new arrangement simply makes explicit what has been the case for years.

In the same vein, Chrysler has now agreed to cede a majority share to the UAW, with big Gov taking a 10% stake. So, basically, the inmates are running the asylum. May U.S.G.M. and U.S. Chrysler get exactly what they've bought, I say.

As a side note, Ron Gettelfinger, the UAW's chief executive, is a graduate of the Indiana University School of Business. Thus, I'm sure he'll be more than capable of guiding these firms to success. Right? I guess it could be worse. He could be from Purdue.

What I want to know is, if the union is going to own Chrysler, and the government owns GM, who will the workers threaten to strike against?

Monday, April 27, 2009

Consult Your Regulator to See if Twitter is Right for You!

In yet another example of how regulators exert unfathomable control on business, this WSJ article describes how corporations are wary of disseminating information to investors via Twitter and blogs, lest they incur the wrath of the SEC. Here's a quote:

But even some tech-savvy companies remain wary. Intel Corp. in May will be among the first companies to allow shareholders to ask questions via the Web and vote online during its annual meeting. But the chip maker avoids blogs and Twitter for investor issues, because it fears violating SEC disclosure rules or inviting public criticism in a company-hosted forum, says Kevin Sellers, vice president of investor relations.

The second concern is valid, although I think Intel would get over it. The fact that disclosing more, and more easily accessible, information would violate SEC disclosure rules boggles the mind. This shows the pointlessness, in addition to the more obvious violation of individual rights, inherent in corporate regulation. Regulations are statutory, they are static, while the business world is dynamic and ever-changing. Companies should not have to ask the SEC's permission every time they want to improve service to their shareholders.

For another example of regulatory abuse, see the ongoing saga regarding how Paulson and Bernanke forced Ken Lewis to betray Bank of America's shareholders "for the good of the country." (To be blogged on once more details have trickled in.)

Thursday, April 23, 2009

Time for a Morale Booser...Asian Style

Last week's Economist had a nice little feature on Yuzaburo Mogi, the leader of Kikkoman. You know, the soy sauce people. I had never heard of this gentleman before, but apparently his family was one of the founding families of the company, which "traces its origins to the early 17th century." I'm a sucker for some good soy sauce, so this story's got some special meaning for me. Regardless, it's a great business article all-around.

Mr. Mogi, apparently, is not afraid to break with tradition when it comes to growing his firm. In the fifties, Kikkoman marketed their sauce as an "all-purpose seasoning" so as to attract June Cleaver and her friends. They introduced terriyaki sauce in the U.S., designed for U.S. consumers as a barbecue glaze (I had no idea), and are now eyeing South American tastes, "such as a soy sauce that can be sprinkled on rice--something that is not done in Japan." They're also trying to sell soy sauce in China (which seems like selling cheese in Wisconsin). In the land of cheap knock-offs, Mogi is planning to sell his usually mainstream product as a premium brand.

Read the article. It'll make you feel good about the world for a few minutes.

Wednesday, April 22, 2009

His Royal Barackness, King of Corporations

Holman Jenkins writes the "Business World" column for the WSJ, and he always has some pretty humorous and generally useful insights. Today's column pokes fun at the fact that Barack is acting like a monarch, and discusses the debacle of GM in this context. The article is worth reading for its descriptions of the various ways Barack is ensuring GM's abject failue under the guise of helping it along. But I particularly enjoyed the jabs at His Majesty. Like this picture:
[Business World]
I also enjoyed this paragraph:
King Barack could take a leaf from St. Jimmy the Simple, who faced a collapse of the railroad industry. He signed the Staggers deregulation law, returning power to the industry itself to decide what services to provide and which customers to chase. What had previously been an industrial basket case, halfway nationalized already, fixed itself almost overnight.
That would be Jimmy Carter, in case you didn't know.

Financial Innovators

Gordon Crovitz had a decent column on financial innovators in the WSJ on Monday. He compares financial innovators to other, more physical innovators, who have provided incalculable value to civilization. I particularly like this passage:
The innovators who thought up the elevator, the cotton gin and space travel didn't intend to kill or injure people as they perfected the technologies. Likewise, today's financial engineers never imagined their miscalculations could result in a global recession.
Now, as any thinking person understands, their miscalculations resulted in a global recession because they assumed a normal level of risk in the system, as opposed to a government-subsidized, fucktardedly high level of risk. Regardless, the appreciation for innovators is welcome. Crovitz discusses how sometimes failure is necessary to learn how to do something right. A good lesson, and I think there's a Thomas Edison quote to that effect that I'm sure I've mentioned before.

On the other hand, Crovitz goes on to quote Robert Murton, a famous Harvard economist who's screwed up quite a few times. He produced this gem back in '94: "any virtue can become a vice if taken to extreme, and just so with the application of mathematical models in finance practice."

No, Bob, if your virtue becomes a vice when taken to extreme, YOU'RE DOING IT WRONG! Still, the article is worth a read.

Wednesday, April 15, 2009

Accounting Bitch #3

Here's an aggravating link from my good friend Billy over at UT Austin. The article discusses Goldman Sachs' change of their calendar, a move that just happens to leave the disastrous month of December as a footnote in their financial statements, enabling them to show quasi-healthy profits this quarter.

What's aggravating is the sheer meaninglessness of corporate financial reporting. As I've said before, the best option for an investor is to look at cash. Look at the cash a firm generates. Poor cash management is what typically brings down corporations, and the current myriad accounting rules only serve to hide poor cash management. On the other hand, the rules can also mask a good cash position, such as in the case of mark-to-market, where banks were forced to write down assets to ridiculously low levels, even though those assets were still generating cash.

Look to cash. Always look to cash.

Monday, April 13, 2009

How Absolute Power Is Obtained Today

I would like to comment briefly on what I see as the new form of power grab that the Obama administration has begun to employ. It used to be that the government caused some problem by distorting markets, blamed the non-existent free market for those problems, and grabbed even more power as a result. This method has worked very well for them over the years.

Now, however, Obama is employing a new, quasi-European form of power grab. I find it interesting, because they are abusing people's respect for an old and valid principle in order to destroy that same principle. (Rand said something about undermining the meaning of concepts, didn't she?)

What I am referring to is the involuntary infusion of capital into private firms, the imposition of rules and oversight on the basis that the government is a legitimate stakeholder, and finally the refusal to accept the money back. People respect the government's increased role because they see the infusion of capital as a legitimate claim. The refusal of repayment, as well as the involuntary nature of the loans in the first place, destroy this concept, but naturally they are all done very secretly.

It should be clear to anyone who knows the facts that the purpose of this facade is to grant Obama and his cohort absolute control over the actions of individual banks and auto firms, as well as whatever other poor companies have the misfortune of catching the King's eye.

Wednesday, April 8, 2009

You're Damn Right "Survival of the Fittest"

Okay, that last post was depressing, so how about something positive? On the front page of today's WSJ, I spotted this feature. It tells a heart-warming tale of a well-run business taking advantage of other firms' shortcomings in an economic downturn, seizing opportunity wherever it appears, even if the article's author sounds like he would have supported the "Anti-Dog-Eat-Dog Rule." It starts like this:

Roy Calcagne offers a simple explanation for why, in the midst of a grueling downturn, his company is selling more sofas and love seats than before."

We're stealing market share," says the chief executive of Craftmaster Furniture Inc., a maker of upholstered pieces with two large factories here.

Huh, imagine that. While I hardly think Mr. Calcagne really thinks of his firm's actions as theft, the article's author seems to take those words to heart. The tone of the piece implies that existing firms have a right to their market share, and that there's something unwholesome about Craftmaster's attempts to unseat their larger rivals, like they should be gracious in their limited success.

Nevertheless, this is still a story to provide some more intellectual ammunition for those of us who respect business as value creation, and want to know that that practice still exists in this country.

You Want I Should Exchange Our Convertible Bonds for Equity, Boss?

Sorry I've been so intermittent with the posts lately, I've been extremely busy. Here's a couple of posts to catch us all up on what's happening in business.

First, I saw this on the cover of the WSJ yesterday, and I honestly felt a chill down my spine. It's a feature article about the TARP's "chief investment officer." Before getting into philosophical analysis of the situation, just look at the guy! He looks like one of Jack Nicholson's low-level enforcers from The Departed. To make it worse, although any moderately rational individual could have seen this coming, he acts like it too:

Tall, bald and blunt, Mr. Lambright has gained a reputation within the government for his tough negotiating style, which at times has irked those seeking aid and ruffled the feathers of some colleagues. Some have criticized Mr. Lambright for demanding too many concessions, including restrictions on executive compensation. Some of his own colleagues have urged him to cool his rhetoric.

"He's unbelievably tough, and sometimes needs to be reminded that the job is to save the financial system," says former Treasury Secretary Henry Paulson, who hired Mr. Lambright at the Treasury.

Paulson thinks he's tough! This Stanford thug makes Paulson look like Mr. Clean. Ladies and Gentleman, I give you the new power center of our economy: a smart, well-dressed version of an underworld hit man. Well, we knew it would happen some day.

Saturday, April 4, 2009


Today's Profile in Contradiction comes to you from the foremost guru of management, Peter Drucker. Since I'm going to be joining the ranks of the management academe, I felt I should educate myself as to the musings of the great Drucker. And so, perusing his Concept of the Corporation, I came across this excerpt:
Though we have largely abandoned it in legal and political practice, the old crude fiction still lingers on which regards the corporation as nothing but the sum of the property rights of the individual shareholders. Thus, for instance, the president of a company will report to the shareholders on the state of "their" company. In this conventional formula the corporation is seen as transitory and as existing only by virtue of a legal fiction while the shareholder is regarded as permanent and actual. In the social reality of today, however, shareholders are but one of several groups of people who stand in a special relationship to the corporation. The corporation is permanent, the shareholder is transitory. It might even be said without much exaggeration that the corporation is really socially and politically a priori whereas the shareholder's position is derivative and exists only in contemplation of law.
He doesn't ever really say what makes the shareholder view "crude," but then who ever does? This "stakeholder" theory of business is old news today, and is typically paid lip service in any business ethics context. Thankfully, most of business academia is still focused on maximizing shareholder value. Which is good, because how exactly does a business exist without owners? Providing capital and getting return on investment is an indispensable element of capitalism.

Now, Drucker's not perfect, but he understands a few basic points. For one thing, he isn't exactly a stakeholder theorist in the way many closet Marxists are. He's more of a corporation theorist, basically holding that the corporation is an end in itself and all effort should be directed toward the betterment of the firm. (Incidentally, one wonders what this means if not maximizing shareholder value.) So, I feel I should present a more present quote of his from the preceding page:
Survival as an organization is the first law of the corporation as of any institution; and ability to performs its own purpose, to produce goods with the maximum economic return, is its first yardstick of achievement.
Sounds like maximizing shareholder value to me, but hell, what do I know?

Wednesday, April 1, 2009

Where was this the last eight years?

Congressman Paul Ryan from Wisconsin had an op-ed in the WSJ today outlining the Republicans' alternative budget for this year. Ryan's a good egg, a very small-government Republican, not perfect but a saint by Congressional standards. He is now the ranking Republican on the House Budget Committee, a position long overdue him. I'd like to see him try to run for President.

Anyway, most of the alternative budget is garbage just like Obama's budget, and keeps spending pretty constant, but there is a nice little component on tax reform:
- Tax Reform. Our budget does not raise taxes, and makes permanent the 2001 and 2003 tax laws. In fact, we cut taxes and reform the tax system. Individuals can choose to pay their federal taxes under the existing code, or move to a highly simplified system that fits on a post card, with few deductions and two rates. Specifically, couples pay 10% on their first $100,000 in income (singles on $50,000) and 25% above that. Capital gains and dividends are taxed at 15%, and the death tax is repealed. The proposal includes generous standard and personal exemptions such that a family of four earning $39,000 would not pay tax on that amount. In an effort to revive peoples' lost savings, and to create an incentive for risk-taking and investment, the budget repeals the capital gains tax through 2010 for all taxpayers.

On the business side, the budget permanently cuts the uncompetitive corporate income tax rate -- currently the second highest in the industrialized world -- to 25%. This puts American companies in a better position to lead in the global economy, promotes jobs here at home, and strengthens worker paychecks.

My, that sounds nice. Too bad Republicans these days are about as powerful as a solar-powered night light. Where the hell was this budget when you guys ran the show? Two-tiered flat tax? (Well, it's flatter than the current system) 25% corporate rate? Repealed capital gains tax? (True, only for a year, but hey, it's a start) Republicans make me sick. They only get principled when the know none of this shit will get passed.

Proposing a budget like this now when they had eight years to easily slide it through Congress is a welcome change, but it is really disingenuous considering it has -500% chance of beating Obama's budget. "A" for effort, though, boys.